If you’ve been trading in currencies, you will be familiar with how volatile the forex market can be. This volatility, while throwing up a host of opportunities, increases risk in equal measure. The good news is that it can be dealt with by adopting hedging strategies that act as insurance to your trades. A good hedging strategy helps you maintain your financial health. The easiest way to do so is to invest in a hedge fund, which is a pool of investments that manages risk with a wide variety and volume of trades. Another option is to get well-versed in trading strategies adopted by hedge funds and use them for yourself to make some good trades. Sounds like an attractive proposition, doesn’t it?
Hedge funds form a significant part of the forex market and are known to generate hefty returns, while keeping investor’s money relatively safe. So, how do they do that? The answer lies in the various trading strategies adopted by these funds to make the best of the price differences between different currencies and take advantage of inefficiencies in the market. Not all hedge funds adopt the same type of trading strategies. While some may put emphasis on arbitrage situations, others may focus on more specific situations, and some may even use complicated dual long/short investment strategies.
Although hedge funds work like mutual funds, they are less regulated, have more stringent minimum investment requirements and pursue more flexible and potentially risky strategies. Another thing to be careful about when investing in hedge funds is that they operate with far less disclosure.
While no specific strategy can be said to be the secret of a hedge fund’s success, some widely used strategies include:
These trading strategies may or may not yield results, depending on the overall economic trends and the monetary policies of the countries involved. Buying the US dollar, which was one of the most popular momentum and carry style trades in recent months, has flopped. While the traders were expecting fiscal stimulus and higher interest rates, scant policy details and the possibility of Europe and Japan exiting quantitative easing have negatively impacted the foreign currency market.
So, although hedge fund trading strategies are an effective tool to balance the volatility in the forex market, their success depends on varied factors, including government policies and the overall economic situation. Individual investors can learn these strategies and use them to their advantage since they deal in smaller trades that do not have a significant impact on the overall trend.
If you liked this educational article please consult our Risk Disclosure Notice before starting to trade. Trading leveraged products involves a high level of risk. You may lose more than your invested capital.